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How to Use a What-if Analysis to Measure the Effects of Your Decisions

An illustration demonstrating how to use a what-if analysis to measure decision effects on a phone.

This post was written by Toni Akinwumi.

They say that the only constant in life is change and the pace at which society moves, this can be hard to keep up with. We’ve seen the rise and fall of some behemoth companies like Blackberry and Blockbuster that were great examples of a lack of preparedness to pivot in the right direction.

According to Forbes, Blockbuster’s business model was dependent on customers going into its physical locations and also racking up late fees. But as entertainment became available online, more consumers were staying home. If these companies had adopted a more data-informed approach to their business model, maybe they’d still exist today. 

In this article, we’ll look at how you can preemptively prepare for uncertainty through the use of what-if scenarios, and then deep dive into strategies you can adopt when things occur out of your control.

There are a lot of variables that go into the day-to-day of running your business. From ensuring the supply chain is operating seamlessly and your products are priced correctly, to managing your employees and the customer experience. When contemplating the future of your business, you’ll quickly realize there are some unknowns that are within your control and also some out of it. 

For example:

  • What if we expand into a new location and it’s not successful?
  • How much can my supplier increase their production costs before I have to change my prices?
  • What if consumers’ behavior changes and they don’t have as much of an appetite for our product anymore?”

Before you go ahead and make any decisions, conducting a what-if analysis can help you understand the full picture.

What is a what-if analysis? 

A what-if analysis or sensitivity analysis is a powerful decision-making tool that helps brands understand what kind of business impacts can arise from changing one or more variables. Through reverse calculations, this is often done on an Excel spreadsheet, and we’ve linked a Google sheet template below.

Why should you use a what-if analysis? 

The success of your business is dependent on your ability to make informed decisions quickly using a mixture of data and your gut.

For instance, if you want to introduce a new product to your product line it’s important to use a mixture of your own customer behavior (e.g. customer purchase data) in addition to trusting that your team has a good understanding of what your customers might enjoy. But by using a what-if analysis approach, you could prepare for this in advance by weighing applicable variables like low product adoption and set up a pop-up shop allowing people to try the new product. 

This preparation work also applies to more common situations like planning for a sale. Companies run sales for a variety of reasons like getting rid of excess stock or to attract more customers. If you have too little stock and can’t keep up with demand, you might get customers who are detractors, which could end up having a negative impact on your business. On the flip side, if you have too much stock you might run into a situation where you have dead stock which will mean you’ll be operating at a loss. 

How to do it? 

Use the model template to start building your own and reference it when planning for the quarter or year. 

Download what-if analysis template

Now that you’ve built out several business impact scenarios, we’ve listed three key strategies to keep in mind in managing uncertain situations impacting your business. 

Re-evaluate your business model 

Earlier, I shared about Blockbuster’s downfall when it missed the opportunity to cater to changing consumer behaviors. With disruptors like Netflix as its competition, any changes made would’ve been too little too late. Any good business understands that if your strategy changes, then you’ll most likely need to modify your business model accordingly. 

As governments around the world are encouraging its residents to stay home and take proper sanitary measures, the retail industry has been turned on its head in the midst of a retail comeback. Coresight Research predicts that more than 15,000 stores could shutter in 2020, up from 2019’s record 9,548 closures. They also anticipate more retailers will file for bankruptcy this year or even liquidating entirely.

On the other hand, this could be a great opportunity for your brand to pivot your offering or your marketing strategies. There have been many examples of brands pivoting to lend a hand to the frontlines or their own communities like Gymshark did by inspiring their community to stay active at home.

Adopt a customer-first approach

You might run the numbers and find that a potential business decision will have a negative effect on your shoppers in the short-term. As long as the long-term outcome is good, you might decide to proceed with your decision regardless. Ensure you communicate with your customers and position your messaging in the most effective way for them to receive. In our current climate, if you anticipate any changes to your service offering, send an email to your customers giving them the heads up and also include additional contact information to make it easier for them to make changes to their orders. 

TakeCare Supply was enlisted to help provide masks for frontline healthcare workers, so they sent out an email informing their customers about these changes and how it would affect their delivery times. See below: 

takecare supply email

They also included a support email that disgruntled customers could contact to cancel their orders if they were unhappy with the shipping delays. Your customers will not only appreciate your transparency, but also the option to takean out if they’d prefer. And it could also lead to positive effects on your bottom line: An American Express survey found that 70% of U.S. consumers say they’ve spent more money to do business with a company that delivers great service. Building up trust with loyal and new customers is the great customer service that they expect to make their purchasing decisions easier. 

Be transparent with your employees

No matter how severe things might get for your business, understand that employees across the world are looking for some guidance and solutions to manage their stress and anxiety during a challenging time in your business. They’re looking to their leaders for transparent and timely messaging.

This is a good opportunity to flex your leadership skills and share details about where your company will be headed, and also listen to your employees, allowing them to express how they might be feeling. Communication is a two-way street so opening the lines of communication can alleviate some of the feelings that come with dealing with uncertainty. 

For some businesses, the impact will greatly affect revenue to the point where hard decisions have to be made about staffing. If that’s not the case for you, this is the time to reassure your employees and cut costs in other areas of your business. Ask yourself:

  • How can I automate some of my workflows?
  • Should we take out a loan to cover some of our costs?
  • Which areas in the production process can we reduce costs?

This is the time to take a deeper look at some of the areas of your business bleeding money and also an opportunity to ramp up your employees to do more within your company instead of hiring more people. Regardless of what cuts you choose to make, note that transparency is key to managing a happy workforce

Dealing with uncertainty is not an easy challenge to maneuver. When you’re feeling that there are too many variables outside your control, remember that proactively using data can help you make informed decisions for your business. When things happen that you can’t forecast, be open to new ideas for what direction you can take your company and make sure you’re managing key relationships essential to the success of your brand.

This article originally appeared in the Shopify Plus blog and has been published here with permission.

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